Breeding massive rounds these days is so commonplace that most of us ignore fundraising news completely. The fundraising environment has changed so much over the past four years, it’s almost incomprehensible to those of us who have lived through it.
There’s been a lot of talk about how ridiculous end-of-phase rounds have gotten. Bill Gurley wrote one of the best articles I have read on the subject recently; To raise last-minute tricks, startups are subject to much less diligence and scrutiny than they would if they decided to go public. As a result, many late-stage startups lack the operational discipline to go public. I would say the trend spills over to the early stages of venture capital-backed companies and really starts there.
Start-up CEO we practically learn not to even use a financial model in any of their fundraising decks until they get to their Series B. It’s about creating products from the early stages, right? You don’t have to worry about finding a business because it’s all about growing at the start, right? Wrong.
Every CEO should fully understand the cost of doing business before deciding to raise outside capital. you do not want your burn rate to get ridiculous at first, then force yourself to put together something basic, even if it’s outside your comfort zone.
For those of you who are short on time, I decided to set up something very basic for you, which will at least allow you to begin to understand how much you need to collect to reach your next milestone. I used Gumroad to share the link – you don’t have to pay anything to download the model – just donate “$ 0”. Some notes on my model are below.
It is not a universal solution. Consider personalizing this in the context of your business. For example, some businesses may want to get a lot more detail on sales expenses to see if it makes sense to build a business sales team. In order to analyze these costs, you will need to add a lot of details on individual seller quotas, seasonality, ramp time and many other factors. My model simplistically takes a look at the full cost of sellers if they hit their quota.
Include all your recurring expenses, however small. The little things add up, and you’ll find you’re spending a lot more than you should on services you aren’t using. Once you take note of all the small expenses, you will realize that you are burning a big hole in your wallet.
Note just as small as a domain you bought from GoDaddy for $ 19.95 / year; you have to be frugal at first to be disciplined. Unexpected or unaccounted for expenses will kill your startup faster than a bullet.
You should eventually take the time to build a marketing funnel. As you grow as a business, the marketing tab should be more granular and based on an actual cost per acquisition number. For example, if you know it costs you $ 200 to acquire a customer and you know your conversion rate by channel (Facebook, Google, email, etc.), you should create an addendum to it. which specifies which channels you intend to spend.
Really sophisticated (usually a growth stage) businesses can imagine this and know exactly how many leads they will ‘buy’ with their new funding, how many will convert to qualified leads for sale, and how many will ultimately become paying (and know) customers. LTV). This helps businesses understand how quickly they can grow on their funding.
You’ll be spending more on vendors than you think, so write it off considerably. The one that always attracts people is the “recruiting expenses”. The market is hyper-competitive for talent right now, and you may think for a moment that you can do it on your own. The reality is, you’ll hire an emergency recruiter at some point in your business lifecycle, and when you do, you’ll receive a surprise bill for $ 25,000. I recommend third party services to hire engineers; this eliminates the risk of this type of expense as you only pay if the employee trains for an extended period.
“Fringe” is much higher than you might think. The cost of hiring a full-time salaried employee in the San Francisco Bay Area is high. It’s not limited to the salary itself – you have to weigh in on the cost of the employee to factor in things like healthcare, 401k (if you have one), payroll taxes, etc. Hiring a $ 100,000 full-time employee in San Francisco actually costs a lot more than $ 100,000.
Office prices are getting ridiculous. I often joke with my other founding friends that the reason companies have to raise so much is to pay their rent. Depending on the neighborhood, you spend up to $ 97 per square foot in San Francisco. Not only that, but it’s rare to find a property management company these days accepting you for leases of less than three years. Kiss a few hundred thousand of your shiny new money in an office.
The bottom line is money goes extremely fast depending on where you are based. Bay Area Salaries and the offices are out of control (but the talent pool and access to capital is amazing), and if you’re building a business here, you’re going to need more capital. That being said, don’t upgrade a dollar more than you need to, otherwise you might end up like Javeed of “Silicon Valley”.
I encourage all start-up entrepreneurs to use this, or something like that when considering how much to raise.